How to invest in biotech stocks without being an expert: Biotech ETFs

In part one yesterday, we covered the biotech industry and the early signs of a bottom in the industry.

Like most of us who last took a science course in high school, you’re probably no expert on the subject.

So what can you do if you’re looking for exposure without grinding out a Ph.D.? The simple answer: Exchange-traded funds (ETFs).

Actively managed biotech ETFs

With active ETFs, the team behind the ETF is actively buying and selling fund positions at their discretion.

One of the most well-known actively managed biotech ETFs is the ARK Genomic Revolution ETF (BATS:ARKG).

• The fund focuses on CRISPR, targeted therapeutics, bioinformatics, molecular diagnostics and more. That’s a handful.
• ARK Genomic was ARK’s top-performing fund of 2020 — returning 180% compared to 152% in Cathie Wood’s flagship ARK Innovation ETF (BATS:ARKK).

But those returns reversed in 2022 — falling 67% and 72% from their 2021 peaks, respectively.

Devil’s advocate: 3 reasons why ARK’s ETFs aren’t for you.

Even active funds might be too risky for some investors despite the diversification. Another option is going passive.

Passively managed biotech ETFs

Passively managed ETFs track an index or pre-defined group of companies — which rarely change. For example:

• The iShares Biotechnology ETF (NASDAQ:IBB) tracks the NASDAQ Biotechnology Index.
• The index is heavily diversified within the sector, with 369 U.S. biotech and pharmaceutical companies making up the index.

While the $IBB covers companies in various medical research and treatment fields, investors can get even more granular with specialized ETFs.

1/ The Loncar Cancer Immunotherapy ETF (NASDAQ:CNCR) holds 30 companies developing therapies to treat cancer.

2/ ALPS Medical Breakthroughs ETF (NYSE:SBIO) holds small-mid cap U.S. biotech companies with at least one drug in Phase II or III of FDA clinical trials.

Investors: Passive vs. Active

With actively managed ETFs, investors get the benefit of diversification and teams of experts managing the fund — but that also exposes you to human judgment and error.

• Managers of actively managed ETFs try to outperform benchmarks, leading to higher risk-taking and greater volatility.
• Fees are also higher with actively managed funds (i.e., $ARKG has a 0.75% management fee vs. $IBB’s 0.45%).

With passive ETFs, the more specialized you go, the higher the risk — which doesn’t always translate into higher returns.